Capitalizing on Europe's Undervalued Small-Cap Opportunities in 2026

The European small-cap landscape is undergoing a quiet but significant transformation. As macroeconomic headwinds ease and fiscal policies shift toward growth-oriented frameworks, investors are increasingly turning their attention to overlooked sectors and companies with resilient fundamentals. The STOXX Europe 600 Index, which has gained 13% year-to-date in 2025, underscores this trend, outperforming the S&P 500 in U.S. dollar terms amid a weaker dollar and accommodative monetary policies. For 2026, the outlook is even more compelling: earnings growth is projected to accelerate to 12% as currency pressures abate and fiscal stimulus, particularly in Germany, narrows the growth gap between Europe and the U.S. This environment presents a unique opportunity to capitalize on undervalued small-cap equities, particularly in the industrials and technology sectors.

Idun Industrier: A Case Study in Industrial Resilience

Idun Industrier AB (publ) exemplifies the potential of European small-cap industrials. In 2025, the company achieved a 35.1% year-over-year earnings growth, outpacing the Industrials industry average of 18.9%. Its Q3 2025 results further highlight its operational strength: sales of SEK521 million and net income rising to SEK14 million from SEK7 million in the prior year. Idun's financial health has also improved markedly, with debt declining from 210.8% to 120.8% over five years and a robust EBIT interest coverage ratio of 3.2x. These metrics reflect a company that is not only weathering macroeconomic challenges but actively strengthening its balance sheet.

The broader industrial sector is poised to benefit from Europe's fiscal policies, which emphasize infrastructure and manufacturing modernization. Idun's focus on manufacturing and service & maintenance segments aligns with these priorities, positioning it to capture incremental demand as governments ramp up capital expenditures.

Momentum Group: Strategic Acquisitions and Margin Discipline

Momentum Group, another standout in the European small-cap arena, demonstrated resilience in Q3 2025 with a 7% revenue increase to SEK746 million and EBITA rising to SEK95 million. The company offset weaker sales trends in comparable units through cost adjustments and strategic acquisitions, which contributed SEK300 million in annual revenue. This disciplined approach to margin preservation-maintaining a strong operating margin of 10.9% despite economic pressures-highlights Momentum's operational agility.

Momentum's performance is emblematic of a broader trend: European small-cap companies leveraging M&A to scale operations and diversify revenue streams. As fiscal stimulus continues to flow into sectors like construction and logistics, Momentum's acquisition-driven growth strategy could unlock further value in 2026.

Smartoptics Group: Scaling in the Neocloud Era

Smartoptics Group ASA stands at the intersection of technological innovation and market expansion. In Q3 2025, the company reported a 46.2% year-over-year revenue increase to $19 million, with EBITDA margins improving to 12.6% (or 16.5% excluding one-offs). Its gross margin also rose to 49.5%, reflecting efficient cost management. Smartoptics is capitalizing on the neocloud market's growth, expanding its presence in the Americas and establishing teams in South America and Asia.

The company's long-term goals-to triple market share and expand in AI, enterprise, and regional operator segments-align with the surging demand for high-capacity data transport. As Europe's fiscal policies increasingly support digital infrastructure, Smartoptics is well-positioned to scale production through partnerships with EMS suppliers, ensuring it meets rising demand without overextending its balance sheet.

Macroeconomic Tailwinds: STOXX 600 and Fiscal Policy

The STOXX Europe 600 Index's performance in 2025-up 2.35% in Q3 alone-reflects growing confidence in European equities. This momentum is underpinned by subdued inflation, which has reduced pressure on central banks to tighten monetary policy, and fiscal initiatives such as the EU Savings and Investment Union, which aim to boost retail and institutional participation in equity markets. Germany's planned fiscal stimulus, in particular, is expected to narrow the growth gap between Europe and the U.S., further enhancing the appeal of small-cap stocks.

For investors, the combination of strong company fundamentals and favorable macroeconomic conditions creates a compelling case for European small-cap equities. Idun Industrier, Momentum Group, and Smartoptics Group each demonstrate how companies can leverage operational discipline, strategic acquisitions, and technological innovation to thrive in a shifting economic landscape.

Conclusion: A Strategic Path Forward

As 2026 approaches, the European small-cap market offers a unique confluence of undervaluation, resilience, and growth potential. Idun Industrier's industrial strength, Momentum Group's margin discipline, and Smartoptics Group's technological scalability are not isolated successes but indicative of a broader trend. By aligning with companies that exhibit these traits and capitalizing on the tailwinds of fiscal stimulus and subdued inflation, investors can position themselves to benefit from Europe's next phase of economic expansion.